Middlesex Consulting Insights

Selling Service Contracts Is A Team Effort

Sam Klaidman - Monday, July 10, 2017

A Sales, Manufacturing, and Service meeting about a new customer

Sketch pf a meetingImagine you head up the aftermarket service business of a large capital equipment manufacturing business.  One day you and the head of manufacturing received a meeting invitation from one of the business’ top sales people, Suzie Sales.  She said that she had been working for almost ten months on landing an order from a new customer. This order was very important because the customer plans on replacing 13 old, similar products in the next 18 months and they view this initial order as a “try before they buy” test.

Mark Manufacturing looked at the PO and smiled.  He said, “This order is for our highest volume standard product.  The required ship date is in 12 weeks and our current lead-time is 8 weeks. We can ship one month early if you want us to.”  The sales lady smiles and told him she did not want to reset the customer’s expectations just now so aim for the earlier date and she will confirm with you and them in one month.  That way we will not overcommit and disappoint the customer.  They shook hands and Mark left the meeting.

Suzie then started talking with Steve Service.  She gave him speech number 2 about how important it is that the installation be perfect and then any problems get solved quickly with lots of communication with the customer and her.  Steve reassured her that they treat all customers as very important; that they have a Customer Satisfaction score of 96% for installations and their help desk is the best in the industry.  

Steve then looked at the order and said, “How come they did not buy our service contract for the year or more after the warranty expires?”  Suzie said she did not offer it to them.  This was how Steve felt!

Man angry with woman


Fortunately, Steve took a deep breath and remembered what he learned many years ago in a soft-skills training class. Here is the conversation between them:

Steve: “Why did the customer buy our kit?”

Suzie: “Because it is the best in the world”

Steve: “Why was that so important?”

Suzie: “Because they will lose about $100,000 per day if the product is unavailable.”  

Steve: “And does the customer think it will never fail?”

Suzie: “Of course not”

Steve: “At the last sales meeting I described our Platinum contract with 4 hour response on a 24 x 7 basis.  Remember that?”

Suzie: “Yes, and I was impressed”

Steve: “So why did you not explain that the annual cost of the contract would easily be recovered if there was one outage a year. And if there were two outages in a year he would have an ROI of about 100%.  And, if they buy the Platinum contracts at the time of the sale we automatically apply it during the warranty period at no extra cost.  We also treat the warranty period as the try before you buy experience.”

Suzie: “I was afraid to mention downtime but your contract professionally addresses the real world and provides a great way to mitigate risk.  Thanks for the private tutoring.  If I can get his PO changed, will the offer still be honored?”

Steve: “As Nick Francis, CEO of Net Scout says, ‘ I never feel bad about selling when it ties directly back to business value for the customer.’ Here is my iPhone.  Make the call now!”

This is a true story.  I happens every day all over the world.  Sales people sell products because their prospects need the outcomes the product creates to do their job. They need it when they need it.  They know that, as one of my customers once told me, “What man creates, breaks.” Yet, the sales folk are afraid to talk about service.

 Responsibilities of the Service head

 As a service professional, we have some internal jobs that are critical for customer retention and long-term satisfaction.

  • We must hire, train, and motivate a great service organization

  • We must understand why companies buy our products and how they use them

  • We must have excellent service contracts that address real customer needs 

  • We must price our contracts so they create customer value

  • We must communicate the unique value proposition of each plan to both our customers and internal customer-facing colleagues

  • We must fairly and consistently compensate anyone we want to sell our service contracts

  • We must fairly reward customer-facing people who do not actually sell for us but recommend or suggest the contracts and enable the sale

  • We must honor the people who do their jobs for us in a way that motivates them and also the rest of the company.

Sales and Service misalignment

But what if Sales and Service do not routinely cooperate in taking care of their customers?  The technical term is misalignment.  They each march to the beat of a different drummer.  Instead of looking at each other as peers, they each see a variation of this picture:

Sales and Support

The service team generally refers to Sales as the dark side.  You have to Purell your hands after a handshake with sales.  And Sales sees Service as a bunch of people dragging their knuckles on the ground.  Or, just a bunch of people only good for updating customer information in the CRM system and maybe, just maybe, they will pass on an upgrade lead if I buy them lunch once a month.


What if both groups had shared goals that counted for the same percent of their bonus?  Goals like customer acquisition, customer retention, total revenue, overall customer satisfaction, etc. Clearly, this effort would very quickly break down the silos.  

Building teamwork

Sales and service teams generally have an annual meeting.  But at different times and different venues.  Sales meet in Hawaii, Las Vegas, or Orlando in January or February.  Service meets in the headquarters or some other inexpensive place like Orlando in July. But what if both groups met at the same time and at the same place?  Each could have separate breakout sessions but meals, activities and, most importantly, awards dinners would be held together.  Think of the results of this kind of team building.  

In one company where I headed up service, the sales and service teams in a city would coordinate their vacation schedules and cover for each other if necessary.  I remember one year our Atlanta service engineer wanted to go back to the UK for Christmas and the Salesman told me he had the key to where the engineer stored his spare parts and would be happy to answer any emergency calls so the rest of the national service team could stay home with their families.

In another company, our Sales teams always invited their local engineer to participate in demonstrations because they really understood how to drive the product and it gave the prospects the opportunity to meet the person who would support their equipment when they purchased from us.

The ultimate case of teamwork was in an important but sparsely populated region.  Our sales agent retired and the Sales VP and I jointly decided that my local engineer would now work for both of us.  He would sell product and then install and service it.  When we offered him the job, he was excited because he felt he would take better care of the customers than the independent sales agent.  I explained that my only requirement was that a service call took absolute priority over a sales call.  He was genuinely upset that I had mentioned it – that was going to be his one requirement. That move was made in 2004 and it is still in place as I write this post! And business in the region has grown at a faster rate than before the change.

Key Takeaway

Both Sales and service people must be engaged with the company’s prospects and customers during the total relationships.  And both groups have to learn to work and play well together and it is management’s job to make sure this happens.

In other words, we must eliminate the “dark sides”!


How To Avoid Operating In One Of The Two Unsustainable Zones – Part 2 of 2 Parts

Sam Klaidman - Monday, June 26, 2017

In Part 1 of this post, I talked about the relationship between customer satisfaction and loyalty and introduced the concept of the zone of indifference.  This zone is the broad middle ground between top and bottom boxes on a customer satisfaction survey.  In this post, I will discuss the relationship between customer experiences and expectations and talk about the zone of tolerance and it’s complement the zone of intolerance.

Zone of Tolerance

In the ideal world, when two or more parties make commitments to each other, there are clearly defined expectations made and agreed.  For example, if I say “I will pay you $500.00 for your Canon Digital SLR camera tomorrow at lunch when you give me the camera.  I will test it and, if it does not work, then I will return it to you and this deal is off.”  It is clear what both parties will do.  

Unfortunately, frequently in the real world, expectations are not as clear as the example.  Commitments made by one party are not clearly understood by the other party.  For example, “Our service engineer will show up at you office early tomorrow afternoon and the job should not take more than 2 or 3 hours to complete.”  Sounds simple, but what happens if the engineer does not have the necessary part and so cannot start work until 10AM the following morning when FedEx delivers it.  Assume the repair took two hours – the engineer and her manager feel they did what they promised.  The customer is really disappointed because he had to wait almost another half a day to get on with his work.  They certainly won’t be excited about the long downtime but they may tolerate the situation.  

This figure shows the above situation in two forms - if the downtime is very important or if it is not so important:

Zone of Tolerance

Lets talk our way through this figure.  For the most important case, there are two different expectations:
1. The description of the desired service – show up by 3PM today and get the air conditioner running before you go back to your shop today.
2. The description of what the customer will accept – diagnose the problem today and get the a/c running before noon tomorrow if you do not have the required part on your truck.

In other words, the customer is saying “I want it fixed tonight but will tolerate a delay until tomorrow if you have to get a part and cannot come back before tomorrow morning.”  A loyal customer since she is willing to accept an inconvenience because she trusts your business.

Now, let us look at the least important case.  For the same air conditioner, maybe the humidifier has a very slow drip.  The water is dripping into a large bucket that will hold a few days worth of leak before needing to be emptied.  In this case, there are lower expectations and a larger zone of tolerance.

In both cases, the customer may still be very satisfied if you meet her level of desired service. As long as you achieve the adequate service level, you will satisfy her and may even make her very satisfied.  However, this will keep you nearly out of the zone of well done!

Zone of Intolerance

But what happens if you fail to meet the customer’s expectation of adequate service?  Look here:

Zone of Intolerance

Once you fail to perform at the adequate service level, you fall into the zone of intolerance.  This is where the customer starts venting to friends and associates and calls your help line and immediately asks for a supervisor, manager, or Vice President.  Not a pleasant situation.

When you fail to even achieve the level of unacceptable service, you should start monitoring social media.  You rapidly transition through the zone of indifference and you turn your customer into a terrorist.  In many companies, you do not want to be the person who helped a customer become a terrorist.  And if they are a key account, you need to start looking for a box to take your possessions home when you are fired.  

Take away

You must do everything you can to keep your customers out of the zone of indifference.  The best way to do that is to meet your customers desired service level and, if you absolutely cannot achieve that level of performance, you MUST meet her adequate service level.  Not meeting that service level means you risk turning your customer into a terrorist who will do whatever she can to negatively impact your future business.

Learn this lesson well.

How To Avoid Operating In One Of The Two Unsustainable Customer Satisfaction Zones – Part 1 of 2 Parts

Sam Klaidman - Monday, June 12, 2017

When designing your services, products, or customer interaction, you must be aware of how your customers will feel about their experiences.  Once you know this, you can make plans to make your customers feel more positive about doing business with you.  

In this post we will discuss the relationship between customer satisfaction and customer loyalty, the Apostle model, and the dreaded “zone of indifference”, which is like a black hole and should be avoided if possible.

In the next post we will discuss how customers feel about any perceived gaps between how they expect your company to perform and how the company actually performs.  And we will discuss the “zone of tolerance” and why it can also be considered to be a black hole.

First, let me first define the two key terms I just mentioned.

Definition of indifference - Lack of interest in or concern about something.  For example, when my wife asks me what I want for dinner I generally reply “Whatever you make is fine”, or just “whatever.”

Definition of tolerance - The ability to accept, experience, or survive something harmful or unpleasant.  For example, “Would you mind shopping for dinner tonight” generally causes me to make a sarcastic comment like “I can’t think of anything I would rather do.”

Note that both words are weak and passive.  Hardly the way you want your customers to feel about the experience you deliver.  

Apostle Model

This model made an early appearance in the July-August 2008 issue of the Harvard Business Review in "Putting the Service Profit Chain to Work" by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger.  The model demonstrated the relationship of customer satisfaction and customer loyalty.  I took the liberty of modifying the original graphic to reflect the current method of measuring satisfaction on a five-point scale and customer loyalty on the 11-point NPS scale. 

Apostle Model

If we use the 5-point scale, the area from 2 to 4 inclusive is the zone of indifference.  People in this zone are wiling to listen to discussions of products or service which compete with the ones they use.  And, it will not take a major selling concession to get them to change suppliers.

Think about commodities like paper, fuel, and clothing.  How many of us care which brand we favor?  We care about price and functionality.  If it meets our basic expectation and the price is right, we will buy it.  Actually, we are more loyal to the retailer than the product.  I use Staples paper for my printer and a well-known off-brand gasoline supplier for my car.

If the price is relatively large, like a car, I care more about the brand than with a commodity but over time, I have come to believe that all new cars at about the same price point will get me where I need to go as good as any other brand.  And many make me feel the same as the rest of the crowd.

In the B2B world, there may be reasons for loyalty other than pure satisfaction with the product or service.  If my company has a number of the same products throughout the company, then we most likely will increase capacity with another of the same model.  This is because the user community already knows how to use it and their procedures translate well to newer units.

The best example I can think of is computer software.  “Everybody” uses Microsoft office because we all know how to use the products, we have help readily available, and we are ensured of compatibility of our work.  Similarly, Apple users are extremely loyal because they don’t want to learn the tricks of another operating system.

In the CX world, many people believe that a target response should be either of the top two boxes.  So, a 4 or 5 is considered equally good and no one gets concerned if the 4’s start piling up.  However, from this graphic, we can see that a 4 is to be considered as needs improvement and people have to be more concerned about improving these customer perception than any of the lower results since they are so very close to the top box and only need an incremental improvement to become loyal and an advocate.


Take away

When administering customer satisfaction surveys, anything less than the top box must be considered unacceptable.
  

Will The Open-Source Movement Disrupt Your Industry?

Sam Klaidman - Monday, May 29, 2017

Will The Open-Source Movement Disrupt Your Industry?

When most of us read stories about how this industry or that one is being disrupted by low-cost, open-source products we say: “Can’t happen to me.  Our products are too complicated, have too little volume, or just not interesting enough for the disrupters.”  

Think again!


Introduction

Before I started writing this post, I did a quick Google search on a few key terms.  Here are the results:  


I was not surprised by the results for software or data communications equipment but I was for the others.  I thought they were disruption-proof but as you will see towards the end of this post, there is already a thriving industry within the laboratory community (which is where many of my readers are engaged).

The first major high-tech industry to be disrupted by open-source products was software.  Who ever thought that Windows would be competing with a no-cost, open-source software product called Linux?  Or that Chrome, Firefox, Edge, and Opera would take on (and beat) Internet Explorer?  But this is an old story! 
 
Let us continue by discussing some large contemporary situations.

The Data Communications Networks

On May 21, 2017, Business Insider published an article called “Inside Facebook’s Plan to Eat Another $350 Billion IT Market”.  This section uses paragraphs from the article to describe how open-source products may well disrupt a giant industry.
  

On an ordinary work day in mid-2016, a handful of Facebook engineers were sitting on the couches in a corner of the company's Menlo Park, California, headquarters when one of them tossed out a wacky idea. He suggested doing something that had never been done before and could potentially upend the $350 billion telecom market. 

"It can't be so difficult to build our own system," the engineer said, referring to the telecom equipment that sends data across cables and wireless networks, and which the engineer suspected could be made to operate faster and cheaper than the pricey equipment sold by big vendors like Nortel, Huawei, Ericsson, Cisco or Juniper Networks. 

Facebook's director of engineering Hans-Juergen Schmidtke, who was among those on the couch that day, was at first a naysayer. "Building a system ten years ago was like building a new company," Schmidtke said. 

Still, Schmidtke agreed to help this tiny group hack together a white box system at one of Facebook's famous hackathons. Three months later they had a working prototype. Six months later, on November 1, they announced it to the world as a real product called Voyager. 

When most of us read stories about how this industry or that one is being disrupted by low-cost, open-source products we say: “Can’t happen to me.  

Voyager was the first product, and a major proving point, for Facebook's young Telecom Infrastructure Project (TIP), a consortium led by Facebook and launched at the industry's worldwide gathering, Mobile World Congress, on February 21, 2016. 

TIP is a spin-off from a similar organization Facebook launched a few years ago called the Open Compute Project (OCP).  Facebook launched OCP and TIP because it had to take control over the technology it uses to support over 1.8 billion people uploading billions of photos, videos and updates every day. 

OCP created so much competition for hardware vendors like Hewlett Packard and Dell that they opted to join the organization and embrace the white box concept. The alternative was to be squeezed out of selling their products to companies with the biggest and fastest-growing data centers in the world, not just Facebook, but Microsoft, Goldman Sachs and dozens of others. 

And Voyager isn't the only product. TIP's OpenCellular project is working on an open source 4G LTE/LTE base station, the hardware and the software. 

Another Data Communications Initiative

On April 5, 2017, Business Insider published an article called “AT&T just completed a first-of-a-kind test – and Cisco should be terrified”. This section uses paragraphs from the article to describe how open-source products may well disrupt a giant industry.

A week ago, AT&T did something with network technology that's never been done before, and companies like Cisco and Juniper Network should be terrified.

AT&T ran a test using data from its customers that proved it could build a superfast, reliable network with inexpensive no-name computer switches, some open-source software, and software from a startup.

The no-name hardware devices AT&T used are known as "white box" switches in industry speak.

But that's not all. AT&T's test, conducted last Tuesday, successfully sent data from one white-box switch in Washington built with one kind of computer chip to another one in San Francisco from a different vendor using a different computer chip. That means a company doesn't need to buy all its networking gear from one vendor to have everything work well together.

AT&T used this network gear with its homegrown network-management software, called ECOMP, that makes sure all the data gets to where it's supposed to go.

And AT&T has given ECOMP to the Linux Foundation, meaning anyone can take that software, use it, and contribute to it. That includes other telecom network providers, some of whom are trying it now and would likely be interested in the low-cost hardware AT&T just tested.

Seeing the writing on the wall, Juniper and Arista have begun to sell versions of their network software that could run on white-box switches.

Cisco is working on a similar thing, internally called Lindt, according to a report by Kevin McLaughlin in The Information, although Cisco wouldn't publicly confirm that.

But selling the software without the high-end hardware could lead to a major decline in revenue for Cisco and possibly cannibalize its largest, most important product lines.

Imagine being able to buy Apple's iOS, put it on a $99 phone, and have it all work great.

That's the quandary Cisco faces. And AT&T just made this problem very real and very public.

Data Center Infrastructure

On October 28, 2016, Business Insider published an article called “LinkedIn is working on a project that should terrify Cisco and the rest of the $175 billion hardware industry”. This section uses paragraphs from the article to describe how open-source products may well disrupt a giant industry.

In the shadow of its acquisition by Microsoft, LinkedIn has quietly begun talking about an internal project that has the potential to shake up the roughly $175 billion data-center hardware market. 

LinkedIn's plan is somewhat similar to what Facebook is doing with its Open Compute Project. OCP is creating brand-new "open source" data-center hardware, in which the engineers from different companies work together and everyone freely shares the designs. 

In its five years, OCP has upended the data-center market and generated a cultlike following so big that when Apple forbade its networking team to join OCP, the whole team up and quit. Likewise, LinkedIn is designing and building nearly all the pieces and parts of software and hardware that it needs for its data centers, poaching key people from Facebook and Juniper to do it. 

"We are not building servers and switches and all these things because we want to be good at it. We are doing it because we believe it gives us an advantage to control our own destiny," Zaid Ali Kahn, senior director of infrastructure architecture and operations at LinkedIn, told Business Insider. 

This is a terrifying trend for vendors like Cisco and Juniper. In the past, only the biggest internet companies like Amazon, Google, and Facebook have gone this route: designing their own IT infrastructure from scratch. 

The story begins with a Facebook network hardware engineer named Yuval Bachar. He was part of a Facebook team in 2013 that had a big goal: reducing the price of building a super-high-speed computer networks tenfold. Facebook had stolen him from Cisco, and he did a stint at Juniper, too. 

He wanted to pay $1 per gigabyte, or $100 for each piece of network equipment that normally costs $2,500 — and he publicly announced the goal at an industry conference. 

About the time Bachar announced his goal, the LinkedIn networking team was struggling with its own network, which wasn't handling the company's user growth very well. 

"The Production Engineering Operations (PEO) team found it very difficult to meet the demands of our applications when network routers and switches are beholden to commercial vendors, who are in control of features and fixing bugs," Kahn wrote in a blog post. 

LinkedIn PigeonIn early 2015, the team began to build its own switch, called Pigeon. In the fall, it hired Kahn to help do it. It began testing the switch early this year. 

In the meantime, having been a part of OCP, Bachar came up with a similar plan for LinkedIn. OCP started by creating a rack that holds stacks of computers, storage drives, and network switches. 

As a company grows, it simply adds more switches, servers, and disk drives to the rack. But the racks themselves can be expensive, including all sorts of bells and whistles that LinkedIn didn't need. 

Facebook had the same problem, so it built a stripped-down 21-inch rack, then designed its own servers and storage to put in it. 

But hardly anyone else uses a 21-inch rack. "Probably 99.5% [of companies] are using a 19-inch rack," Kahn told us. 

That means for LinkedIn (or anyone else) to use Facebook's rack, it had to renegotiate supply deals with its vendors to get gear in different sizes. 

It was deja vu. Bachar led an initiative called Open 19 to create an open standard for a low-cost 19-inch rack. This rack can be stuffed with 96 servers for $50,000 total, saving $25 million across a 500-rack data center, the organization says. 

Having seen the impact of OCP, vendors jumped on board, including some of the Chinese contract manufacturers that have made a killing supporting OCP. Hewlett-Packard Enterprise, which was late to OCP, is also a member. 

Laboratory Products

Scientific and analytical products seem to me to be immune to open-source disruption.  Most are based on proprietary sensors and data analysis algorithms and have to be traceable to recognized standards before their results are accepted.  But there are still many product areas that are being created and built by innovative lab workers who are trying to save money by participating in the DIY trend.

One of the more interesting sources I looked at was “Open-hardware’ pioneers push for low-cost lab kit” by Elizabeth Gibney that appeared in Nature on March 8, 2016.  Here are the first two paragraphs:

Few scientists know that, instead of buying their lab equipment, they can often build it much more cheaply — and customize their creations — by following ‘open-hardware’ instructions that are freely available online.

Fifty enthusiasts who gathered last week at CERN, Europe’s particle-physics laboratory near Geneva, Switzerland, are hoping to remedy researchers’ lack of awareness about open science hardware. At the first conference dedicated to the field, they met to compare creations — and to thrash out a road map to promote the widespread manufacturing and sharing of labware. “We want open hardware to become a normal part of the scientific process,” says Shannon Dosemagen, a co-organizer of the conference who is executive director of the non-profit citizen-science community Public Lab.

This photograph accompanied the article:

Op[en-source lab products

open-source lab bookOne of the attendees at the conference was Dr. Joshua M. Pearce, author of Open-Source Lab, How to Build Your Own Hardware and Reduce Research Costs.  Dr. Pearce maintains a website, Thingiverse.com, which contains a large amount of help and guidance on how to construct numerous laboratory equipment projects.

One of the enabling technologies for open-source lab equipment is a 3D printer. I even saw instructions about how to print a 3D printer on a 3D printer.

So, while the traditional scientific and analytical instrument manufacturers are not yet being threatened like the computer and communications manufacturers are, you will be remiss if you do not look for an open-source competitor if this is your industry.  And if you are responsible for supporting and servicing scientific and analytical instrument, you should be redoubling your efforts to make the low cost DIY products look less attractive because of your ongoing customer value creation.

Are You Next?



How To Maximize Service Contract Renewals

Sam Klaidman - Monday, May 15, 2017

This post was adapted from an article written by Sam Klaidman and Dennis Gershowitz that originally appeared in the September 2009 edition of the AFSMI Sbusiness News (no longer published).

ExpiredEver wonder why people fail to renew an existing service contract?  Looking for the right actions to take to preserve and grow your revenue stream?  Then look no further. This post will identify the reasons that customer’s buy and renew service contracts and also the nine most important reasons why they do not renew and what you can do to minimize this churn.

Why people buy service contracts

One prerequisite for selling contracts and anything else is that it must offer value to the purchaser.  If there is insufficient real or perceived value, it will not be purchased.  Our research indicates that most contracts are purchased or renewed for one of these reasons:

  1. To reduce hassle - “One call, and the service organization owns the problem.” 

  2. To maximize equipment uptime - “The service organization keeps my equipment operational and available.” 

  3. Predictable expenses - “I will never exceed my budget with your service organization.” 

  4. Peace of mind - “The service organization has my back covered.”

Why people do not renew a service contract

Here are six reasons that are mostly within your control that cause you to lose contract renewals:

1. You fail to deliver on your value proposition.  This frequently happens with very reliable equipment coupled with few, if any, value-added services.  The contract is perceived as an insurance policy with a low likelihood of being cashed in.  We hear comments like, “If I would have known the equipment was so reliable, I would never have purchased the contract.”

To avoid this situation, make sure your contract is valuable, especially if the equipment is very reliable.  There are two ways you can do so:

  • Make sure your contract marketing documentation includes all services provided.  For instance, if you offer free telephone support, make sure this is clearly stated.  The same with any other services. 

  • Include services available only to contract customers or to non-customers at a premium cost.  For example, include priority telephone response with the contract and sell the enhanced response for a higher price to increase the value of the contract.  Same thing with priority parts availability, rapid on-site response, and so forth. 

2. Competition offers a similar contract at a lower price or you are not consistently exceeding your customer’s expectations or building loyalty.  When a company’s experiences meet expectations, they purchase on price.  But when their expectations are exceeded, they purchase on value.  You should be continually demonstrating value to protect your business.

To avoid this dilemma, monitor two factors:

  • How your customers rate your business.  What is important to them, and how successful are you in delivering against their expectations?  Focus on key drivers to impact current service business and future sales. 

  • Your competitive landscape.  Are your competitors offering multi-vendor service (very common in the healthcare, instrumentation, and data communications industries)?  Are other software providers moving to the software as a service (SaaS) model? You must strengthen your delivery processes and evaluate the opportunity to enter the multi-vendor service or SaaS arena.  This is not a decision to be taken lightly, but nor should it be the result of a multi-year study.  Evaluate, make a business case, and decide quickly but thoughtfully. 

3. Too much hassle.  Customers want their service provider to take full responsibility for quickly solving their problem.  For them, managing the resolution process is a real hassle.  Forcing customers to do what they perceive as your job equates to low performance against expectations.

You can find out if your processes and people are letting your customers down through transaction surveys.  You will quickly learn if they are happy or if you need to redesign processes, retrain or replace people, or both.

4. Uptime fails to meet expectations.  Frequently when people recommend the purchase of capital equipment (hardware and/or software), they feel as though they are playing a game of “You Bet Your Job.”  If their recommendation is accepted and the equipment fails expectations, then at best, they used bad judgment and could lose their job.  Customers protect themselves by purchasing a contract.  If you do not help them meet the CapEx assumptions, they have choices:

  • Self-maintenance.

  • Third party.

  • Time and materials.

  • Scrap the product (the most drastic and least likely choice—barring the semiconductor industry.)

Your contract should include an uptime expectation.  Every service organization should be monitoring their contract customer’s uptime.  If there is unreasonable downtime, take the responsibility to identify the root cause for a solution.  We know of one company that actually replaced a piece of equipment worth several hundred thousand dollars because it was unreliable.  It was returned and completely diagnosed.  The outcomes were:

  • A delighted customer.

  • An opportunity to identify and repair the root cause of the failure.

  • A great story to use with prospects.

  • A demonstration of contract commitment.

  • An opportunity to educate and motivate employees. 

When you are putting together the terms, conditions, and deliverables of the agreement with your customers, keep in mind that meeting or exceeding these expectations measures success.  It is better to consider what you can deliver, and then exceed those expectations. 

5. Your service contract requires unplanned (and unbudgeted) expenditures.  Contracts may not cover all possible expenses.  And the buyer of the contract may not always be aware of certain limitations (who really reads all the fine print?). 

When designing service contracts, carefully evaluate the value proposition and any deviations that will adversely affect the customer.  Make sure that the cost/benefits of exclusions exceed the emotional downsides of your decision.  Any exclusion must be clearly articulated.  You must be able to do this, and they must “pass the smell test – if it stinks don’t do it” 

6. You dropped the ball and did not deliver peace of mind. 

Your customer lost confidence in your ability to fulfill the terms (both written and implied) of the contract. 

This is an emotional situation that’s difficult to rectify.  When it happens, it is critical that all efforts be made to correct the situation.  Unless the organization learns where and why it dropped the ball, it will continue and like a stone rolling downhill, it will accelerate with time, since it is the beginning of a downward spiral: lose revenue → cut costs (people) → lose more revenue. 

Bang head against brick wallThree reasons for failure to renew service contracts that are beyond the service provider’s control

In addition to the reasons within your control that customers do not renew a service contract, there are three additional reasons why people do not renew. 

1. Going out of business.  If your front-line support or your accounts receivables department is in contact with your customers, then this should not come as a surprise.  Internal customer employees know when workloads and equipment utilization are decreasing.  They are very good at reading the tea leaves and assessing the situation.  This does not have to be a loss, but it can generate additional business.  If a customer is forced to liquidate, there is a good possibility that the equipment will be sold. 

Make sure you have equipment history records, keep track of the purchaser, and offer to de-install the equipment (if appropriate), move it to the new location, reinstall it, train the new operators, and place it under contract.  If you are managing a single territory or country, you may lose the service revenue.  If you do your job well, someone in your company will enjoy the long-term benefits.

2. Downsizing or closing the operation or project. Perhaps this results in mothballing or selling the equipment. This is very similar to “going out of business,” except the company is still obligated to fulfill its contracts. 

If your equipment is taken out of service, make a relationship-vs.-money decision. Do you want to void the contract and earn goodwill with the business?  You may also make some form of pro-rata adjustment for the balance due, or you can take a hard line and demand full payment for the term balance.  This last action helps your financial results for the short term and may earn you internal respect for your business acumen, but it may turn the company or its employees against you.  There is no correct answer.  It depends on the factors involved.  Remember, if you work in a limited marketplace, the people you are working with may relocate and become your customer again. 

3. Corporate mandate goes into effect to cancel service contracts.  This is a typical cost-cutting, knee-jerk reaction, along with travel and wage freezes, reducing employee education, and other measures. 

This situation is possibly the most difficult to navigate.  If your customer believes the situation is “temporary,” you must decide what benefits of the contract you will pass along while they are on a pay-as-you-go scheme.  You want to demonstrate continuing support, but you do not want to deliver such a high level of service that the customer does not reinstate the contract when the corporate mandate is lifted.  And of course, you have to make the same decision when the customer downsizes.  Do you suspend the contract, prorate it, cancel it (with or without penalties), or negotiate an extended or deferred payment scheme? 

Conclusion 

In the long run, it is the responsibility of the service organization’s management team to make sure that it is doing everything it can to prevent losing customers.  It is a shame to lose the contract because the organization did not execute the plan. 
Finally, if the organization drops the ball, then treat the customer as you would want to be treated.  Do what’s right.  It may not always save the customer, but it will send a message to the organization that its promises matter. 


The Three Primary Jobs Of Business Leaders

Sam Klaidman - Monday, May 01, 2017

We are all trying to improve how we do our jobs.  That is just the way we are programmed.  And if part or most of our job involves dealing with customers, we then have an extra challenge – figuring out what they are trying to accomplish. Harvard Professor Clayton Christensen calls this “the job-to-be-done.”  

We will not be successful in creating, designing, and commercializing new services until we can communicate how they will help our prospects and customers improve the outcomes of their jobs.

 

We define customer value as the tangible and/or emotional net improvements (benefits minus costs) to customer outcomes resulting from using or owning the supplier’s products and/or services, compared to all alternatives.

 

We created this graphic to help us all understand the high level jobs that each level of worker in an organization is tasked with:


Employee level and responsibilities

Since this blog is aimed towards B2B, capital equipment service providers, I will focus the rest of this post on that group.

When we sell our traditional services, we generally sell to lower level employees while strategic services usually involve someone in the C-suite.  For example:


This is important since by understanding what each person’s responsibilities are, you can define and communicate your services while shining the spotlight of what each person considers essential.  

Selling to the first two levels is business as usual.  By now you know how to sell these basic services since they are today’s bread and butter products.  But things are different when selling to the C-Suite.  Fortunately, this diagram shows that creating customer value is the answer, although the implementation is really challenging.

Think about the definition of customer value that I showed you at the top of this post.  Creating customer value helps the C-Suite achieve their top three objectives.  

Mission ImpossibleSo, your mission is to create value for your prospects and then to communicate that value clearly and accurately.  I will not dwell on customer value creation here… it is too big a subject.  But I will pass along a warning about communicating the value you are prepared to create.


The following quote is from a CustomerCentric Selling blog titled Sales Tips: WHY Should Buyers Buy from You?

“Most buyers will take the “value proposition” savings and cut them in half because sellers are often guilty of hyping offerings.  

Dependent upon the offerings, some buyers will double costs because if any implementation effort is necessary, it always takes longer than expected.  In such cases, this means that sellers and buyers are off by a factor of 400%!"

What many sellers do when preparing proposals for deals worth at least $500,000 is hire an independent consultant to audit the value proposition assumptions and calculations.  Like a CPA’s financial report audit statement, they certify that, in their opinion, the information presented is accurate.  At least this approach will reduce the potential gap from 400% to something that leaves your proposal still reasonable and hence reduces the likelihood that the buyer does nothing!

Key Takeaway

As you sell higher up the food chain, you must focus on creating value for your customers.  And the three outcomes the C-Suite values are growing revenue, cost reduction, and risk mitigation.


7 Reasons New Services Fail

Sam Klaidman - Monday, April 17, 2017

For service executives, the good news is that new product introductions fail more frequently than new service introductions,  especially after we exclude the services associated with the failed new products.  Even better news is the cost of developing the new service is generally less than the cost of developing new products.  However, the bad news for the service executive whose new service was a dud or hasn’t attained it’s full potential is that it is easy to prevent the failure in the first place.

What is a new product failure?

R. G. Cooper is quoted as saying

“about half of all resources allocated to product development and commercialization in the U.S. goes to products that a firm cancels or produce an inadequate financial return.” 

Others estimate that between 20% and 35% of new product projects either get killed before they are launched or never produce a significant return.  Since the number of new services that fail is a smaller number than failed products, the best we can say is that new services generally cover their development costs (usually relatively low).  However, in our experience, the number of “successful” service products that fail to achieve their full earning potential is high.  That is the same as the #1 NFL draft choice that, after five years on a professional team, is still the third string quarterback.  He certainly failed to live up to expectations!

Why Products and Services Fail

In a recent Uservoice.com blog post, the author listed the seven reasons why new products fail. Here is the list with a comparison with why new services fail:

Why new products and services fail

Notice anything special?  Right…the causes of new product and services failure are exactly the same.  That is because both categories are actually products, frequently managed by product managers and subject to the same market issues.  However, there is one one major difference, as shown in the following table, from the most recent CMO semi-annual survey.  The percent of companies budgeting market research for B2B products is 44.5% while the same metric for B2B services is 37.0%.  (20% more products businesses budget for market research than do service businesses.)

What's in your marketing budget?

We can shorten the list of reasons for failed services down to three key items:

  1. Not properly defining the service (wrong needs and wants) for each of your key markets

  2. Incorrect pricing

  3. Customers don’t think you can deliver what you are promising

Not properly defining the service (wrong needs and wants) for each of your key markets

This point incorporates two concepts - identifying each unique market and then defining what each need and want.  Here are two examples from my background. 

When I was heading up customer service in the data communication industry, all of our customers needed high uptime.  But some were more critical than others.  For example, the New York Stock Exchange could not tolerate more that 20 minutes of network downtime during the trading day cumulatively for a calendar year.  Money was almost no object for them to ensure their network was always available.

When I moved to the analytical instruments industry, I discovered that academic customers had very different support requirements then QC groups in manufacturing.  They each had unique needs, with very different response times and very different budgets.

As in many things in business, customer needs and wants change over time.  If it has been more than four to five years since you reviewed how you map your customers into segments and how you structure your service contract components for each, you are probably not maximizing your capture rate and revenue. 

Incorrect pricing

If you are not updating your customer segments and contract content, then it is highly likely that you are also mispricing your services.  Willingness to pay does not increase linearly with contract level.  It increases with the value your customers perceive they will obtain from the purchase.  You can only know this by understanding your customer’s business.

The other thing you should be doing is seeing how your prices compare to other services your customer’s purchase from other companies.  If you are selling into a manufacturing environment, then you should know not only what your competitors charge for their services on equipment similar to yours but also what other manufacturers charge for similar services on all sorts of equipment.

Think about how hard it will be sell your service if your customer has 15 different pieces of equipment and the hourly price for on-site service from the other 14 suppliers ranges from $225 to $275 per hour and you charge $375.  Or, in the same example, how much you are leaving on the table if you only charge $175 per hour.

Customers don’t think you can deliver what you are promising 

In some cases, the end user will still buy a service contract from you because she has to demonstrate to the organization that she is doing everything possible to keep all the equipment running.  But many others will either migrate to self-maintenance or have a Plan-B when they call you and you disappoint, so that they are not caught short.  In any case, you are not doing your company or your department any favors but selling expectations you cannot achieve and you have a high probably of losing customers as soon as they can dump your stuff.

How do you resolve each of these three questions?

Not properly defining the service (wrong needs and wants) for each of your key markets – work with a service marketing consultant to help identify the key segments and then do a market research survey to answer all the questions you have about services, pricing and perception of service capabilities.  It is not as expensive as it sounds and most companies can afford a project without destroying their budget.

Incorrect pricing – your first choice should be to ask your sales people.  If they quote your services while trying to sell products then they most probably have a very good idea about how much each of your major competitors are charging for their services. As a backup, the market research program can also help you understand what your customers are paying others and what they think is reasonable to pay for your services.

Customers don’t think you can deliver what you are promising – If you have an ongoing customer satisfaction program, then you should already know what your customers think about your service.  Also, ask your sales people.  Customers tell them what they think!  And finally, this should also be part of the market research survey.

If you believe that your business would benefit from this type of market research program, then contact Sam to discuss the Middlesex Consulting Customer Focused Market Testing methodology.  And remember that every day you delay you are leaving money on the table which can never be recovered.



When Complexity Is Your Friend

Sam Klaidman - Monday, April 03, 2017

In the past, I have written about complexity and all the damage it does.  I still believe everything I wrote but I now understand that there are some times when complexity is an ally.  Before I explain my new thinking, let’s define complexity.

According to Wikipedia, 

“Complexity is generally used to characterize something with many parts where those parts interact with each other in multiple ways, culminating in a higher order of emergence greater than the sum of its parts.  Just like there is no absolute definition of "intelligence,” there is no absolute definition of complexity.”

What all this means is that complexity exists in the mind of the person thinking about it.  This is just like customer value and customer experience.  And just like those two ideas, complexity depends on the context.  Here is an example of what I mean by context:

Pasta in Bowls

When is a complex situation good for you?

There are two examples that come to mind:

1. You are selling something that is perceived by buyers as being a commodity.
2. Your prospect is happy with their status quo but you think you can add much more value because of your situation.

Both examples are very similar because the prospect does not want to buy from you or anyone else.  They are happy to continue doing what they always did.  If you think this is unusual, you are greatly mistaken.  In 2015, according to SBI, 58% of a typical B2B sales pipeline ended in “no decision.”  

The results of a recent survey conducted by Blumberg Advisory Group and Giuntini and Company indicate that only 30% of companies have achieved service contract attachment rates of 50% or more.  And 16.7% have achieved attachment rates of 70% or better.  I know that mission critical equipment in high-risk businesses have a high probably of achieving greater that a 60% contract capture rate.  Examples are medical imaging systems and networks handling high volume retail or financial transactions.  So, in most cases where a customer does not buy your contract offering, the customer is content to call you for help and pay on a time and material basis.  This is when complexity can become your friend.

If we assume that most business buyers are rational, then the reason they do not buy from you or someone else is that no one offered a good enough value proposition.  That means that the benefits received do not exceed all the costs involved in the purchase in a way to make the purchase worthwhile.  I believe it is also safe to assume that all businesses have a degree of complexity that gets tougher to deal with every year, Work forces change, regulations change, employee skills change, and interests change.  Therefore, you should take the opportunity to spend time with your customer and not only observe how your product is used but what is impacted if it fails or is out of service for an extended time.

Some customers have multiple pieces of equipment that can do the same job but they must first document the fact that the alternate equipment will produce the same results as the original one.  In some manufacturing plants, they maintain a large amount of work-in-process inventory to cover equipment failures or material problems.  Once they stock is consumed, they may have to shut down their production line andin that case, it is your job to find out how much the inventory costs and how much it costs in both lost production and stress for your customer.  (As you know, pressure flows down hill.)

If you or a team spend the necessary time with your customers, you are likely to uncover opportunities to make a complex situation simpler or less expensive.  This means you will be creating customer value at a relative low cost because the service contract is much less expensive than the equipment cost.  Your customer wins because she gets better support and can reduce current in-house costs and your company wins because you sell another contract, improve another relationship, and create a happier customer.

The Secrets Of Closing A B2B Sale

Sam Klaidman - Monday, March 20, 2017

If you are responsible for growing your service business, you are in Sales.  Maybe not product sales but certainly you are selling services.  Also, you probably depend on the sales organization to initially sell service contracts, or other services, along with the product.  So, for these two reasons, you had better understand what B2B selling actually means in the late 2010’s (i.e., NOW!).

You Bet Your Job

You Bet Your JobThe first thing you must internalize is that the buyer, or the buying committee, is risk adverse.  A large part of the buying decision is based on mitigating risk for the people involved in the purchase decision and the business.  IDC recently shared some data that indicated that 28% of C-Suite executives rate risk avoidance as their number one objective.  

When I have one-on-one talks with decision makers, they say that they feel that when making some purchasing decisions, their job is on the line.  They feel they will get fired, or at least have their career put on hold, if the decision yields a bad result!  I modified this “ancient” television sign to update it to current norms.

Once you internalize what the buyers are feeling, you can move on to the four things you must do to help them and your business.

Create Customer Value 

Without getting theoretical or philosophical, I will state with absolute certainty that no one will purchase anything unless she receives benefits worth more that they cost.  The benefits can be quantifiable, i.e., reduce cost, grow revenue, or improve products or processes, or they can be emotional, i.e. save time, improve experience, or rebuild the company’s image in the marketplace.  

It is critical to recognize that the actual value you and your business create only exist in the mind of the buyer.  If your service increases equipment uptime, you can suggest the financial benefit but only the buyer can assign a benefit that is valid for the purchasing company at the time of the assessment.  

Because situations constantly change, the benefit also changes.  For example, if you are selling a widget that increases production by 10% per day and the company already has a large inventory of the item and orders are dribbling in, then your widget is not very valuable.  But, if the next day the widget is highlighted at a National trade show and the video of the demo goes viral, the buyer may need to purchase two or more widgets from you.

Value is also relative to all other options.  If your widget increases the customer’s output by the same 10% per day as above, and a competitor offers their widget+ which increases output by 15% and costs 5% less than your widget, then all other things being equal, your product is essentially worthless to that buyer!

Earn Short-Term Trust

Trust is a strange emotion.  There are many books that tell you how to create trust but emotions, like value, depend on the current circumstances and I just do not trust (sorry for the pun) a book to be able to deal with the range of human emotions.

The reason that earning the buyer’s trust is so important is you need them to carry your message throughout their individual organizations and you are asking them to place their jobs at risk.  They will only carry the message if they have complete confidence that you are telling the whole truth and that the benefits you and they jointly develop are safe.

It is not unusual with very large proposals for the seller to hire an independent third party to confirm all the assumptions and understandings and to calculate the benefits and return on investment (ROI).  The seal of approval, plus all the trust you created during the early selling process, work together to create enough trust for the buyers to want to move forward.

Build Long-Term Trust

This is different from short-term trust.  This is all about giving your prospect the confidence that your business will be viable during the complete lifecycle of your product.

Q. How long can a piece of B2B capital equipment be used and hence, needs support?  

A. Longer than you think.

Here are a few examples:

From SunPower, a manufacturer of solar panels

SunPower Corporation (“SunPower”) warrants that for 25 years beginning on the Warranty Start Date1 (the “Warranty Period”), its photovoltaic modules specified above (“PV Module(s)”), shall be free from defects in materials and workmanship under normal application, installation, use and service conditions, and the power output of the PV Modules will be at least 95% of the Minimum Peak Power2 rating for the first 5 years, and declining by no more than 0.4% per year for the following 20 years, so the power output at the end of the final year of the 25 year warranty period will be at least 87% of the Minimum Peak Power rating.  

That is correct – 25 years!  And the buyers have to trust that the seller will be in business at least that long to honor any warranty.

Extracts from IRS Publication 496 (2016) How To Depreciate Property:

3-year property 

  • Tractor units for over-the-road use. 


5-year property

  • Computers and peripheral equipment or any property used in research or experimentation. 

7-year property

  • Agricultural machinery and equipment.

  • Office furniture and fixtures
  • Any property that does not have a class life and has not been designated by law as being in any other class.

10-year property

  • Vessels, barges, tugs, and similar water transportation equipment. 

As you can see, most B2B capital equipment can be depreciated over seven years.  But…


From the Real World

Many products have a useful life that far exceeds the allowed depreciation time.  Some examples are:

  • Machine tools – software, controls, and sensors may undergo upgrades but the motors, castings, and power handling last for a very long time.

  • Analytical equipment – the rate of change of many instrument classes has slowed to a crawl.  There is little room for innovation and even when there is innovation, many labs keep the old stuff because it is “good enough.”  Think scales, mixers, and pipetting equipment.

  • Transportation equipment – think about the age of the US Air Traffic Control System or the jet plane you just flew on.

When companies make a buying decision, they look at the service record and reputation of all the qualified suppliers and ask themselves “will this business be around in 10 to 15 years and will they be ready, willing, and able to service and support this equipment?”  That is why so many IT buyers stick with IBM.  IBM has been servicing its products for over 100 years and no one doubts that they will continue to do it as long as someone will pay.  In other words:

Nobody every got fired for buying IBM

Communicate How You Create Value

You know your solution offers a significant benefit and you have developed real trust with the buying team.  The last step is to communicate the value proposition so the people you are dealing with can become your internal champion.  This is a big deal because everyone is trying to mitigate risk and the internal people will believe the buying team because they don’t know or have a relationship with you.

This is where you pull your story together.  You share your value proposition, the third party ROI calculation, and the service and support history of the selected supplier.  You give them whatever information they require to feel comfortable.  They carry your flag.  Not because they love you but because they need the business results they will obtain from owning and using your products and services.  

If you did your job properly during the whole process, you will receive the order you had forecast, earn whatever emotional and monetary praise you deserve, and be told to go out and do it again.

Babe Ruth Quote


Such is live as a product or services sales professional.


7 Services To Sell To Customers Who Choose In-House Field Service

Sam Klaidman - Monday, March 13, 2017

This post has been one of our most popular posts from 2014 and is still relevent today. If you missed it the first time, or if you just forgot about it, then I hope it strikes a positive note with you.  


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